Capital Allowances Manual

PMA: Anti-avoidance: Assets being acquired by the seller on hire purchase

CAA01/S229

Two special sets of circumstances involving hire purchase are dealt with here.

The first involves the assignment of the benefit of a hire-purchase contract.

Normally, if a person buying an asset under a hire purchase type contract CA23310 assigns the benefit of the contract the disposal value is:

if the asset has not been brought into use, any capital sums received as consideration, compensation, damages or insurance for the persons rights under the contract or the asset, or

if the asset has been brought into use, the total of any capital sums received as consideration, compensation, damages or insurance for the person’s rights under the contract or the asset, plus the expenditure that the person was treated as having incurred when the asset was brought into use but they have not yet actually incurred CA23330.

These rules could produce unfair results if the anti-avoidance legislation applies.Then the buyer’s qualifying expenditure cannot be more than the seller’s disposal value. If the asset has not been brought into use by the seller the disposal value takes no account of the capital expenditure still to be incurred under the contract.

Example Lovell runs a trucking company. He enters into a hire purchase contract to buy a truck for £50,000. He pays the deposit of £10,000 but then decides that he doesn’t like the truck, so he does not bring it into use and assigns the contract to Jackson, a connected person, for £10,000.

Lovell’s disposal value is £10,000. Jackson will incur capital expenditure of £50,000 on the truck (£10,000 paid to Lovell plus £40,000 still to be paid under the contract).

If the normal rules about assignment of a hire purchase contract applied Jackson’s qualifying expenditure would be restricted to Lovell’s disposal value, £10,000 even though Jackson will incur capital expenditure of £50,000 on the truck.

So the normal rules do not apply where a person buying an asset under a hire purchase contract assigns the benefit of the contract in a transaction where the provisions of this Chapter apply. Instead the seller’s disposal value is - for the purposes only of this Chapter:

any capital sums received as consideration, compensation, damages or insurance for the persons rights under the contract or the asset, and

any capital expenditure still to be incurred under the contract.

The seller is treated as incurring any capital expenditure still to be incurred under the contract in the chargeable period in which the contract is assigned.

Example In the example above the £40,000 still to be incurred under the contract is added to Lovell’s qualifying expenditure and disposal value. Lovell’s disposal value becomes £50,000 and this is the limit on Jackson’s qualifying expenditure.

The second involves plant or machinery being acquired on hire purchase for finance leasing. There is also a departure from the general rules in this case:

the person is not treated as incurring the balance of the capital expenditure under the contract when they bring the plant or machinery into use - i.e. they do not get the benefit of capital allowances on expenditure they have in fact not yet incurred;

but

if they assign the benefit of the contract:

the disposal of the plant or machinery is again the total of any capital sums received as consideration, compensation, damages or insurance for the persons rights under the contract or the asset any capital expenditure still to be incurred under the contract; and

for the purposes of bringing that disposal value into account they are treated as if they has incurred the balance of the capital expenditure under the contract.